Protections for an Association Against Bad Faith Bankruptcy Filings
Federal bankruptcy laws are intended to provide debtors with a fresh start. When a property owner files bankruptcy, federal bankruptcy law imposes an automatic stay on all collection activities, including foreclosure. All “pre-petition” debts (the amount owed at the time of the bankruptcy filing) are handled through the bankruptcy proceeding.
While associations often feel that bankruptcies create huge burdens to the collection procedure, in fact, many times bankruptcies are mutually beneficial to both the association and the owner. In a Chapter 13 bankruptcy, the owner must adhere to a repayment plan (typically over a period of five years) where the owner pays back the assessment arrearage owed to the association. The owner is also required to keep the “post-petition” account (i.e. assessments that come due after the bankruptcy is filed) current. Finally, keeping the owner in the home benefits not only the owner, but also the community.
Sometimes, however, an owner files for bankruptcy protection in bad faith to avoid an obligation to the association. For example, it is not uncommon for an owner to file for Chapter 13 bankruptcy hours before a scheduled sheriff’s sale. The bankruptcy filing effectively stops the foreclosure sale. A short time later, the Chapter 13 bankruptcy case is dismissed because the owner failed to make their Chapter 13 plan repayments or failed to comply with bankruptcy court orders. The association pays to have the foreclosure case reinstated and order a new sheriff’s sale. Again, the owner files for bankruptcy for the sole purpose of stopping the sale without intention of completing the repayment plan, adhering to bankruptcy court orders, or paying the ongoing assessments. This cycle is both frustrating and financially detrimental to an association.
Fortunately, bankruptcy law provides some protections for creditors to stop abuse of the automatic stay by owners who repeatedly file for bankruptcy in bad faith. For example, if an owner files multiple bankruptcy petitions in one year, then the automatic stay may be limited to a 30 day window, or may not even go into effect at all, allowing the association to proceed with the sheriff’s sale. In the most extreme cases, a secured creditor may also be able to have the bankruptcy case dismissed upon a showing of bad faith.
The bankruptcy court may provide a creditor with additional protections based upon the facts of a particular case. For example, imagine the association obtains an injunction in State court against an owner for the removal of a pet after repeated violations of the governing documents and a money judgment award for attorney fees and court costs reimbursement. Subsequently, the owner continues to violate the Declaration’s covenants, fails to comply with multiple State court orders for removal of the animal, and fails to pay the money judgment. Next, the owner files for Chapter 7 bankruptcy protection to avoid the State court money judgment awarded to the association. The bankruptcy court may rule that the State court money judgment is a nondischargeable debt because the owner willfully and maliciously injured the association by failing to comply with the State court order and the association’s Declaration.
The bottom line: an owner who files for bankruptcy protection in bad faith cannot use bankruptcy courts to indefinitely stave off an association from proceeding to sheriff’s sale. Although stopping this abuse can be a frustrating and sometimes lengthy process, there are ways to ensure that community associations, are treated fairly in these situations.